Thoughts about sustainable agriculture and forestry from the Sierra Nevada foothills.

Wednesday, June 29, 2011

Is Profit a Dirty Word?

Dave Pratt, who runs Ranching for Profit schools all over the world, says "Profit is to business as breathing is to life." In other words, profit isn't the reason we're in business, but it's essential to accomplishing the purposes (short- and long-term) of our business.

When thinking about small-scale farming, however, profit can sometimes seem to be a dirty word - both to farmers and to their customers. As a small-scale farmer myself, I admit that I struggle with the idea of profit at times. I think that this struggle, at least in part, comes from my periodic inability to separate profit from the purpose of my business. The purpose of Flying Mule Farm, as I see it, is to provide wholesome food to my community, to leave the land that we manage in better condition than we found it, and to provide my children with opportunities to work outdoors with animals (and to see their father doing something he loves). Reality requires that Flying Mule Farm also provide enough income to cover its own expenses and to support my family's living expenses - minor things like a mortgage, health insurance, groceries (we don't yet grow everything we eat).

Profit, at least in part, is related to scale - but perhaps not in the way most of us think. Big farms aren't necessarily more profitable than my own small-scale operation. However, the scale at which I operate impacts my pricing decisions. Because I only process 20 or so lambs at a time, my transportation and processing costs per lamb are significantly higher than a business that processes thousands of lambs in a day. Consequently, my prices must reflect these higher costs. I think most customers who are committed to supporting a local food system get this - they place greater value on quality and community commitment than they do on convenience or cheap food. Some don't get it, however; these are the folks that tell me that Costco lamb is much cheaper than mine.

Wendell Berry writes, "Are we failing to consider that a family might farm a small acreage, take excellent care of it, make a decent, honorable and independent living from it and yet fail to make what the rest of us would consider a profit?" How does this compare to Dave Pratt's perspective on profit? How do we answer Berry's question in a region where farmland is priced beyond it's productive capacity? Does a farm need to be profitable in an era when a visit to the emergency room costs $700 - even with health insurance?

4 comments:

From an accountants perspective, profit is the golden word, the ultimate goal at the end of the financial statements. While I don't think it's healthy that the pursuit of profit has become the ultimate goal for some in this society (thereby sullying the word), it is essential to keeping a business (and family) going. Beyond a doubt a farm needs to be profitable, it needs to financially support the needs of those who are farming, not just the immediate needs of shelter, food and clothing, but also the long term needs to save for kids college, for retirement. I am uncertain about farming being able to provide for these long term things these days. Meaning that if single, then you will probably have to have at least a part-time off farm job, and if married, one spouse will likely have to have an off farm job to keep the family financial viable. Which I find frustrating.

In my opinion, i do not think the mission conflicts with the need to be profitable. In order to provide food for the community, improving the land, and providing outdoor opportunities on a yearly basis, the farm must either be profitable or subsidized. Most do not have the ability to subsidize for any extended period of time.

The difficulty is the long and many time difficult journey to build to some sort of sufficient scale to achieve that profitability. Even then, there might be a need for a second off-farm income to pay mortgage, etc as we deal in an environment where land prices are based on development, not productive value.

I am not sure I understand what Wendell Berry is saying and it what context. Is he saying that we need to value farming even though it will not produce some huge profit?

Henry Hazlitt, in Economics in One Lesson, describes two functions of profit in a free economy. One,it ensures that the labor and capital devoted to production are in proportion to demand for the product. If you make a profit in grass-based sheep farming, it is a sign that people really want healthy meat, improved landscapes, and better quality of life for farm families. Two, it promotes efficiency; the more efficiently you use your labor and capital, the more profit you will make. The long term result of efficiency is lower prices for the customer.

This has generated some great discussion! Here are a few further thoughts that have occurred to me based on everyone's comments:

The word "profit" seems to have both an economic meaning and a cultural meaning. From an economic perspective, profit means that a business generates enough revenue to cover its direct costs and its overhead costs AND has some leftover. From a cultural perspective, profit carries more baggage. Given the recession we're living through, the word profit brings to mind corporate excess (at least to me).

Economic profit is essential for all farms - not just small ones like mine. Given the math (revenues minus direct costs minus overhead costs equals profit (or loss)), profit is directly related to our decisions on pricing and scale. I'll take on pricing first.

As a small farmer who direct markets my products, I have a moral obligation (to my community and to my fellow farmers) to price my products at a level that generates profit. If I fail in this obligation, my farm is just a hobby. As Matthew Martin from Pyramid Farms put it, "If I'm not profitable, it's just a hobby, and working 12 hour days doesn't feel like a hobby to me." Failure to price our products at a level that generates profit impacts other growers, too - it puts downward pressure on everyone's prices.

The second part of the profit equation (overhead) suggests that scale is also pretty important. Perhaps a bit of economic theory will shed some light on this. Direct costs vary with the number of units produced (in other words, my feed costs are directly related to the number of sheep I have). Overhead costs (sometimes called indirect costs) do not vary with the level of production. My general liability insurance, for example, costs the same whether I have 100 ewes or 1000 ewes. If I can sell a lamb for more than the direct costs of producing it, then I need to sell enough of these lambs to cover my overhead costs if I'm to generate a profit.

I guess I would summarize some of the feedback to my original question about profit as being dismissive. Some of us seem to believe that small farms will never be profitable. I reject that notion. I've worked in agriculture my entire professional life, and in full-time production agriculture for the last five years. I think our society's notions of food and how it should be produced ARE changing - I'm more positive today than I've ever been about the prospects for appropriately-scaled local farming.